Public-Private Partnerships: Pilot Program Needed to Demonstrate 
the Actual Benefits of Using Partnerships (25-JUL-01,		 
GAO-01-906).							 
								 
The U.S. government is one of the world's largest property	 
owners, with a real estate portfolio of more than 400,000 defense
and civilian buildings and more than one-half billion acres of	 
land. Each year, the federal government spends billions of	 
dollars to maintain its buildings. Even so, the General Services 
Administration (GSA) contends that it needs $4 billion, over and 
above these expenditures, to maintain its existing inventory.	 
This report identifies the potential benefits to the federal	 
government of entering into public-private partnerships on real  
property, in which the federal government contributes real	 
property and a private entity contributions financial capital and
borrowing ability to redevelop or renovate the real property. GAO
found that public-private partnership authority could be an	 
important management tool to address problems in deteriorating	 
federal buildings, but further study of how the tool would	 
actually work and its benefits compared to other options is	 
needed. Potential net benefits to the federal government of	 
entering into these public-private partnerships include better	 
space, lower operating costs, and increased revenue without	 
up-front federal capital expenditures if further analysis shows  
that they would not be treated as capital leases for		 
budget-scoring purposes. The potential benefits of public-private
partnerships do not diminish the need for GSA to pursue other	 
alternatives for addressing problems in deteriorating federal	 
buildings.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-906 					        
    ACCNO:   A01444						        
    TITLE:   Public-Private Partnerships: Pilot Program Needed to     
             Demonstrate the Actual Benefits of Using Partnerships            
     DATE:   07/25/2001 
  SUBJECT:   Facility maintenance				 
	     Joint ventures					 
	     Federal property management			 
	     Federal office buildings				 
	     Real property					 

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GAO-01-906
     
Page i GAO- 01- 906 Public- Private Partnerships

Report to Congressional Requesters

United States General Accounting Office

GAO

July 2001 PUBLIC- PRIVATE PARTNERSHIPS

Pilot Program Needed to Demonstrate the Actual Benefits of Using
Partnerships

GAO- 01- 906

Page 1 GAO- 01- 906 Public- Private Partnerships

July 25, 2001 The Honorable Tom Davis The Honorable John Duncan The
Honorable Stephen Horn The Honorable Pete Sessions The Honorable Jim Turner
House of Representatives

As stated in your October 18, 2000, request letter, each year the federal
government spends billions of dollars on maintaining its buildings, yet the
General Services Administration (GSA) has identified a multiyear need for $4
billion, over and above these expenditures, to maintain its existing
inventory. To assist you in reviewing your legislative options in this area,
you asked us to identify the potential benefits to the federal government of
entering into public- private partnerships on real property, in which the
federal government contributes real property and a private entity
contributes financial capital and borrowing ability to redevelop or renovate
the real property. We also note some buildings that are in need of action by
GSA regardless of the applicability or availability of publicprivate
partnerships.

On May 7, 2001, we briefed your offices on the results of our work.
Subsequent to this briefing, your offices asked that we also transmit the
results of our work to you in a report. This report summarizes the results
of our work. Appendix I contains the slides used to brief your offices,
including detailed information on the specific properties that were part of
our study. A glossary of terms that are used in this report begins on page
48.

To identify the potential benefits of allowing federal agencies to enter
into public- private partnerships, we contracted with Ernst & Young LLP,
who, together with a subcontractor, Signet Partners, developed and analyzed
hypothetical partnership scenarios for seven selected GSA buildings. These
hypothetical partnership scenarios were developed especially for this
assignment and are based on information that was made readily available by
representatives of local real estate markets, city governments, and GSA. GSA
had previously contracted with AEW Capital Management, L. P. (AEW) for a
public- private partnership financial viability study for three properties
in Washington, D. C. We contracted with AEW to update its work and included
these three properties in our study. The properties included in our study
were judgmentally selected to include properties

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 01- 906 Public- Private Partnerships

that were diverse (1) geographically, (2) in type and size, and (3) in
historical features. Any actual partnerships involving these properties may
be very different from these hypothetical partnership scenarios. In- depth
feasibility studies would have to be done to evaluate partnership
opportunities before they are undertaken.

This study only looked at the potential benefits to the federal government
and private sector of public- private partnerships as one management tool to
address problems in deteriorating federal buildings. We did not evaluate the
potential benefits of other management tools or methods of financing that
may be available for this purpose, such as federal financing through
appropriations or sales or exchanges of property. Ultimately, all available
alternatives would need to be evaluated to determine which could provide the
best economic value for the government.

Public- private partnership authority could be an important management tool
to address problems in deteriorating federal buildings, but further study of
how the tool would actually work and its benefits compared to other options
is needed. Eight of the 10 GSA properties in our study were strong to
moderate candidates for a partnership because there are potential benefits
for both the private sector and the government. The potential internal rates
of return (IRR) for the private partner ranged from 13.7 to 17.7 percent.
Potential net benefits to the federal government of entering into these
public- private partnerships include improved space, lower operating costs,
and increased revenue without up- front federal capital expenditures if
further analysis shows that they would not be treated as capital leases for
budget- scoring purposes. However, publicprivate partnerships will not
necessarily work or may not be the best option available to address the
problems in all federal properties. Ultimately, public- private partnerships
and all other alternatives would need to be carefully evaluated to determine
which option offers the best economic value for the government. Two of the
GSA properties in our study did not appear viable for partnerships primarily
due to a lack of nonfederal demand for space and low financial return
potential. Furthermore, depending on how the Office of Management and Budget
(OMB) scores the transactions, some of the scenarios in our study could
require up- front funding as capital leases due to the long- term need for
space.

The potential benefits of public- private partnerships do not diminish the
need for GSA to pursue other alternatives for addressing problems in
deteriorating federal buildings. In our study, 6 of the 10 buildings had or
Results in Brief

Page 3 GAO- 01- 906 Public- Private Partnerships

were at risk of having a negative net cash flow. The problems in these
buildings need to be addressed regardless of the availability or
applicability of public- private partnerships.

We are recommending that GSA use all available strategies to address
problems in federal buildings and further explore the benefits of
publicprivate partnerships. We are also suggesting that the Congress
consider providing the Administrator of GSA with the authority to proceed
with a pilot program to demonstrate the actual benefits that may be
achieved. As we stated in April 2001, Congress should also consider allowing
agencies to retain the funds from real property transactions. 1 If such
authority is granted, Congress should continue its appropriation control and
oversight over the use of any funds retained by agencies. GSA concurred with
our findings and recommendations.

The U. S. government is one of the world?s largest property owners, with a
real estate portfolio of over 400, 000 defense and civilian buildings and
over one- half billion acres of land. As we and others have previously
reported, federal asset managers are confronted with numerous challenges in
managing this multibillion- dollar real estate portfolio, including a large
deferred maintenance backlog and obsolete and underutilized properties.
These challenges must be addressed in an environment marked by budgetary
constraints and growing demands to improve service. In response to this
backlog and limited funding for repair and alteration requirements, we have
suggested that the Congress consider providing the Administrator of GSA with
the authority to experiment with funding alternatives, including public-
private partnerships, when they reflect the best economic value available
for the federal government.

The Congress has already enacted legislation that provides certain agencies
with a statutory basis to enter into partnerships. This additional property
management tool has been provided to the Department of Veterans Affairs and
the Department of Defense. In an effort to provide more agencies with a
broader range of property management tools, two bills were introduced, but
were not passed, in the 106th Congress that addressed issues of federal
property management. The Federal Property Asset Management Reform Act of
2000, S. 2805, would have amended the

1 Federal Buildings: Funding Repairs and Alterations Has Been a Challenge-
Expanded Financing Tools Needed (GAO- 01- 452, Apr. 12, 2001). Background

Page 4 GAO- 01- 906 Public- Private Partnerships

Federal Property and Administrative Services Act of 1949 to enhance
governmentwide property management. Among other provisions, the act would
have allowed federal agencies to out- lease underutilized portions of
federal real property for 20 to 35 years and retain the proceeds from the
transfer or disposition of real property. The Federal Asset Management
Improvement Act of 1999, H. R. 3285, provided for the use of (1)
partnerships with the private sector to improve and redevelop federal real
property, (2) performance measures for federal property management, and (3)
proceeds from these partnerships being retained for the improvement of
federal real property. Neither of these bills was passed, but their
provisions reflect the kinds of actions that could be taken to address the
issues surrounding the management of federal real property.

The hypothetical public- private partnerships our contractors developed and
analyzed for 10 specific GSA properties indicated that partnerships could be
a viable management tool. However, more detailed feasibility studies would
need to be done before partnerships are undertaken. In addition, we did not
compare the benefits of public- private partnerships with other alternatives
for addressing problems in federal buildings, such as appropriations for
renovations. Such an analysis of all alternatives would need to be performed
so that the alternative offering the best economic value for the government
could be chosen. OMB staff indicated that where there is a long- term need
for the property by the federal government, it is doubtful that a public-
private partnership would be more economical than directly appropriating
funds for renovation.

Public- private partnerships can take on many different forms. The potential
benefits of any partnership would be largely defined as the partnership is
being formed. The various aspects of the partnership arrangement would be
negotiated and agreed upon, such as the terms of the master ground lease,
which is the mechanism the federal government would use to lease its
property to the partnership, and the redevelopment strategy. Both the
private sector and government would share in the distribution of cash flows
generated by the property.

The hypothetical partnership scenarios developed by our contractors for this
study entailed some basic assumptions about the structure of the
partnerships but did not detail the specifics of each partnership. For
example, the hypothetical partnership scenarios did not guarantee government
occupancy of the properties. However, depending on how OMB scores these
transactions, some of the scenarios could trigger capital lease- scoring
requirements due to the implicit long- term federal need for Public- Private

Partnerships Could Provide Important Benefits to GSA

Page 5 GAO- 01- 906 Public- Private Partnerships

the space. These issues will need to be further explored before
publicprivate partnerships are created.

The redevelopment strategies developed for each property ranged from
repairing and modernizing the existing building to demolishing the existing
building and increasing the amount of office space by rebuilding multiple
buildings on the same site. According to our consultants, the analysis of
the partnerships for many of these properties showed a sufficient potential
financial return to attract private sector interest in a partnership
arrangement. Multiple potential benefits to the federal government of
public- private partnerships were also identified. These potential benefits
include the

 utilization of the untapped value of real property,

 conversion of buildings that are currently a net cost to GSA into net
revenue producers,

 attainment of efficient and repaired federal space,

 reduction of costs incurred in functionally inefficient buildings,

 protection of public interests in historic properties, and

 creation of financial returns for the government. When deciding whether to
enter into a partnership, the government will need to weigh the expected
financial return and other potential benefits against the expected costs,
including potential tax consequences, associated with the partnership. Any
cost associated with vacating buildings for the renovation work to be done
would also have to be considered in any alternative that is evaluated.

For a public- private partnership to be a viable option, there must be
interest from the private sector in partnering with the government on a
selected property. The potential private sector partner?s return from the
partnership is a critical factor in its decision on whether to partner with
the federal government. According to our contractors, about a 15- percent
IRR would likely elicit strong interest from the private sector in a
partnership. However, this is only one factor, and the circumstances and
conditions of each partnership are unique and would have to be evaluated on
a case- by- case basis by both the private sector and the federal
government. For example, a somewhat lower IRR could be attractive if other
conditions, such as the risk level, are favorable. In addition, when our
contractors discussed possible partnership scenarios with local developers,
the developers said that to participate, they would want at least a 50- year
master ground lease. The slides in appendix I, containing detailed
information on the properties, show that the longer lease period

Page 6 GAO- 01- 906 Public- Private Partnerships

would allow for the private sector to maximize its financial return from the
partnership.

Our contractors determined that 8 of the 10 GSA properties in our study were
strong to moderate candidates for public- private partnerships. This
determination was based on the (1) estimated IRR for the private sector
partner in year 10 of the project, which ranged from 13.7 to 17.7 percent;
(2) level of federal demand for the space; and (3) level of nonfederal
demand for space. The level of demand for space, both federal and
nonfederal, affects the level of risk that the space will be vacant and thus
non- income- producing. The stronger the local market is for rental space,
the more likely the space will be rented and thus be income- producing for
the partnership. The properties that were strong candidates for partnerships
were located in areas with a strong federal and nonfederal demand for space;
and many had untapped value that the partnership could utilize, such as
excess land on which a new or expanded building could be built.

Public- private partnerships were not viable for 2 of the 10 GSA properties
in our study. This was primarily due to a weak nonfederal demand for space
and low financial potential. These properties had estimated potential IRRs
of 12.4 and 10.3 percent. In addition to the relatively low IRRs, neither
property had the potential of increasing the amount of rentable space
available to increase the earning potential of the property, and both were
in markets that had vacant office space with little or no demand for new
office space.

Many factors can affect the viability of a partnership arrangement. In
addition to the local federal and nonfederal demand for space, the actual
cost of redevelopment of a property to meet federal needs can greatly affect
the viability of a partnership arrangement. The higher the cost of
renovation, the longer it will take the partnership to recoup its costs and
make a profit, thus affecting the appeal of the partnership to the private
sector.

In GSA?s inventory, numerous buildings either have or are at risk of having
a negative net cash flow due to their deteriorating condition. Four of the
10 buildings in our study are either vacant or were expected to be vacant by
2002, with little prospect of recruiting other agencies to fill the space
because of the condition of the buildings. In addition, two of the other six
buildings we studied were at risk of losing their current tenants because of
the condition of the buildings.

Page 7 GAO- 01- 906 Public- Private Partnerships

If public- private partnership authority becomes available, decisionmakers
and policymakers will need to consider such issues as budget scorekeeping
rules, the type of facilities that would be appropriate for a partnership
arrangement, and congressional review and oversight. In addition, each
property is unique and will thus have unique issues that will need to be
negotiated and addressed as the partnership is formed. Great care will need
to be taken in structuring partnerships to protect the interests of both the
federal government and the private sector. Our study designed a conceptual
framework for public- private partnerships in order to identify potential
benefits of these partnerships. Our study did not identify or address all
the issues of partnerships that will need to be considered by the
decisionmakers and policymakers as partnerships are developed.

Action is needed to fix buildings that are in disrepair and have a negative
net cash flow due to their deteriorating condition. As a result of the
analysis done by our contractors, it appears that allowing GSA and other
property- holding agencies to enter into public- private partnerships may
enable them to deal with some of their deteriorating buildings. Partnerships
could even provide other financial benefits to the federal government, such
as reduced operating expenses and increased income that could be used for
renovating other federal buildings. The potential benefits of public-
private partnerships do not diminish the need for GSA to pursue and consider
other alternatives for addressing problems in deteriorating federal
buildings, such as federal financing through appropriations or the sale or
exchange of property. Regardless of whether public- private partnership
authority is provided, the problems with these buildings need to be
addressed.

We recommend that the Administrator of GSA use all available strategies to
address the problems of buildings in GSA?s inventory that have or are at
risk of having a negative cash flow as a result of their deteriorating
condition. We also recommend that the Administrator of GSA seek statutory
authority to establish a pilot program that would demonstrate the actual
benefits that may be achieved from public- private partnerships that achieve
the best economic value for the government. Conclusion

Recommendation for Executive Action

Page 8 GAO- 01- 906 Public- Private Partnerships

The Congress should consider providing the Administrator of GSA with the
authority to proceed with a pilot program to demonstrate the actual benefits
that may be achieved using public- private partnerships that achieve the
best economic value for the government as a real property management tool.
If such authority is granted, the Congress should consider allowing GSA to
enter into master ground leases of sufficient length to attract private
sector interest in participating in partnerships with the federal
government. Our study found that a 50- year master ground lease was
generally sufficient to attract private sector interest. As we stated in
April 2001, Congress should also consider allowing agencies to retain the
funds from real property transactions. If such authority is granted,
Congress should continue its appropriation control and oversight over the
use of any funds retained by agencies.

On June 28, 2001, we received written comments on this report from GSA?s
Commissioner for the Public Buildings Service. He agreed with the findings
and recommendations in our report and noted a range of property management
tools that GSA is currently using to address the physical conditions of its
real property inventory. These comments are reprinted in appendix II. GSA
officials also provided technical comments, which have been incorporated as
appropriate.

As suggested in your request letter and discussed with your offices, we
hired contractors to develop and analyze hypothetical partnership scenarios
for 10 selected GSA buildings to identify the potential benefits to the
federal government and private sector of allowing federal agencies to enter
into public- private partnerships. GSA?s National Capital Region had
previously contracted for a study to analyze the financial viability of
public- private partnership ventures for three buildings in Washington, D.
C. As agreed with your offices, because the majority of the work for these
properties had already been done, we had the contractor update its work on
these 3 buildings and selected them as 3 of the 10 GSA properties.

To help us select the other 7 properties for our study, GSA provided a list
of 36 properties that it considered good candidates for public- private
partnerships. In preparing this list of properties, GSA officials said that
they considered factors such as the strength of the real estate market in
each area, the extent to which the property was currently utilized or had
land that could be utilized, and the likelihood of receiving appropriations
to rehabilitate the property in the near future. We judgmentally selected
seven properties from this list to include properties (1) from different
Matters for

Congressional Consideration

Agency Comments Methodology

Page 9 GAO- 01- 906 Public- Private Partnerships

geographic areas of the country, (2) of different types and sizes, and (3)
with historic and nonhistoric features.

To analyze the potential viability of public- private partnerships for each
of the 10 selected GSA properties, the contractors did the following:

 analyzed the local real estate markets,

 created a hypothetical partnership scenario and redevelopment plan, and

 constructed a cash flow model. In the contractor?s judgement, the
partnership scenarios were structured to meet current budget- scoring rules
and provisions in H. R. 3285. These provisions included the requirements
that the

 property must be available for lease in whole, or in part, by federal
executive agencies;

 agreements do not guarantee occupancy by the federal government;

 government will not be liable for any actions, debts, or liabilities of
any person under an agreement; and

 leasehold interests of the federal government are senior to those of any
lender of the nongovernmental partner.

However, a determination on how the partnerships would be treated for
budget- scoring purposes would have to be made after more details are
available on the partnerships.

We accompanied the contractor on the visits to the seven GSA properties that
had not been previously studied. We interviewed or participated in
discussions with developers and local officials in the areas where the
properties were located and officials from GSA. We reviewed the contractors?
work on the 10 properties for reasonableness but did not verify the data
used by the contractors.

The partnership viability scenarios developed for this assignment are
hypothetical, based on information that was made readily available by
representatives of the local real estate markets, city governments, and GSA.
Any actual partnerships involving these properties may be very different
from these scenarios. In- depth feasibility studies must be done to evaluate
partnership opportunities before they are pursued. There may be other
benefits and costs that would need to be considered, such as the possible
federal tax consequences and the costs of vacating property during
renovation in some cases.

Page 10 GAO- 01- 906 Public- Private Partnerships

This study only looked at the potential benefits to the federal government
and private sector of public- private partnerships as a management tool to
address problems in deteriorating federal buildings. We did not evaluate the
potential benefits of other management tools that may be available for this
purpose. We did, however, discuss the implications of using publicprivate
partnerships with OMB representatives.

We did our work between November 2000 and June 2001 in accordance with
generally accepted government auditing standards.

As agreed with your offices, unless you publicly announce the contents of
this report earlier, we plan no further distribution of it until 30 days
from the date of this letter. We will then send copies to the Chairmen and
Ranking Minority Members of Committees with jurisdiction over GSA, the
Director of OMB, and the Administrator of GSA. We will make copies available
to others upon request.

Major contributors to this report include Ron King, Maria Edelstein, and
Lisa Wright- Solomon. If you or your staff have any questions, please
contact me or Ron King on (202) 512- 8387 or at ungarb@ gao. gov or kingr@
gao. gov.

Bernard L. Ungar Director, Physical Infrastructure Issues

Appendix 1: Potential Benefits of PublicPrivate Partnerships

Page 11 GAO- 01- 906 Public- Private Partnerships

Appendix 1: Potential Benefits of PublicPrivate Partnerships

1

Potential Benefits of PublicPrivate Partnerships

Appendix 1: Potential Benefits of PublicPrivate Partnerships

Page 12 GAO- 01- 906 Public- Private Partnerships

2

Briefing Contents

*Objectives Methodology  Results in Brief  Public- Private Partnerships 
Appendix I: GSA Properties Analyzed

Appendix 1: Potential Benefits of PublicPrivate Partnerships

Page 13 GAO- 01- 906 Public- Private Partnerships

3

Objectives

Identify the potential benefits to the federal government of entering into
public- private partnerships

Appendix 1: Potential Benefits of PublicPrivate Partnerships

Page 14 GAO- 01- 906 Public- Private Partnerships

4

Methodology

 Interviewed officials from the General Services Administration (GSA), VA,
and DOD

 Employed a consultant to analyze the potential viability of publicprivate
partnerships for seven selected GSA properties. The analysis included

 local real estate markets

 creation of redevelopment strategies, and

 economic feasibility of public- private partnerships

 Employed GSA consultant to update its previous public- private partnership
viability study on three GSA properties

Appendix 1: Potential Benefits of PublicPrivate Partnerships

Page 15 GAO- 01- 906 Public- Private Partnerships

5

Methodology (con?t)

 Reviewed the consultant?s work for reasonableness but did not verify the
data used by the consultants

 Did not evaluate the potential benefits of other management tools or
methods of financing

The partnership viability scenarios developed for this assignment are
hypothetical based on information readily available from people in the local
real estate markets, city officials, and GSA. Any actual partnerships
involving these properties may be very different from these scenarios. In-
depth feasibility studies must be done to evaluate the partnership
opportunities before they are undertaken.

Appendix 1: Potential Benefits of PublicPrivate Partnerships

Page 16 GAO- 01- 906 Public- Private Partnerships

6

Results in Brief

 Public- private partnership authority is worth exploring as a potentially
beneficial property management tool

 Eight of the 10 GSA properties are strong to moderate candidates for a
partnership with potential internal rates of return (IRR) for the private
partner ranging from 13. 7 to 17. 7 percent

 Two of the GSA properties did not appear viable for a partnership largely
due to a lack of nonfederal demand for space and financial potential

 Net benefits to the government are improved space, lower operating costs,
and increased revenue, possibly without federal capital expenditures

Appendix 1: Potential Benefits of PublicPrivate Partnerships

Page 17 GAO- 01- 906 Public- Private Partnerships

7

Results in Brief (cont?d)

 Ground lease of 50+ years may be necessary to attract private sector
interest

 Action needed to stop or prevent the loss of revenue

 GSA needs to further explore the financial feasibility of entering into
public- private partnerships and seek authority to enter into partnerships
as a pilot program to demonstrate the actual benefits that may be achieved.
For those properties that are determined not to be viable for a partnership,
GSA should quickly identify alternative strategies for those buildings.

Appendix 1: Potential Benefits of PublicPrivate Partnerships

Page 18 GAO- 01- 906 Public- Private Partnerships

8

Conditions Governing a Public- Private Partnership

 Property must be available for use in whole, or in part, by federal
executive agencies

 Agreements do not guarantee occupancy by the US

 Government will not be liable for any actions, debts, or liabilities of
any person under an agreement

 Leasehold interests of the US are senior to any lender of the
nongovernmental partner

Note: These conditions are based on legislation that was introduced during
the 106th Congress, H. R. 3285

Appendix 1: Potential Benefits of PublicPrivate Partnerships

Page 19 GAO- 01- 906 Public- Private Partnerships

9

Partnership Structure

Contributions Property Cash Flows Federal Property

(Master Ground Lease)

Private Sector Investment

(Cash and financing ability)

Partnership

Operating income Operating expenses

Net operating income

Master ground lease (to government) Debt service Replacement reserve

Cash flow

Preferred return (to the private partner)

Net cash flow

Government share Private sector

share

Appendix 1: Potential Benefits of PublicPrivate Partnerships

Page 20 GAO- 01- 906 Public- Private Partnerships

10

Constraints Success Factors

Federal Public- Private Partnerships

 Limited federal demand for property

 High cost of remediation or renovation to meet federal needs

 Low market appeal - resulting in diminished investor interest

 Federal budget scoring and legislation do not provide for credit
enhancement or lease guarantees, possibly lessening the potential IRR

Source: Ernst & Young/Signet Partners

 Federal need for property

 Real estate market demand for property

 Ability to attract and utilize private sector resources and expertise

 Sufficient return to developer

 Length of the master lease is sufficient

 Untapped value in underperforming assets

 Conforms with budgetary scoring rules

Appendix 1: Potential Benefits of PublicPrivate Partnerships

Page 21 GAO- 01- 906 Public- Private Partnerships

11

Potential Benefits to Government of Public- Private Partnerships

 Utilizes untapped value of real estate

 Turns buildings which are currently a net cost to GSA into net income
producers

 Achieves efficient and repaired federal space, possibly without direct
federal expenditure

 Avoids on- going expenditures in functionally inefficient buildings

 Protects public interest in historic properties

 Creates financial return for the government

Appendix 1: Potential Benefits of PublicPrivate Partnerships

Page 22 GAO- 01- 906 Public- Private Partnerships

12

Types of Redevelopment Strategies Analyzed for GSA Properties

 Repair and modernization (FOB 8, Minneapolis, Jacksonville, Columbia)

 Demolition of existing building and rebuild like building (Andover,
Charleston)

 Repair/ modernize existing building and construct new building on excess
land (Portland)

 Construct new building on underutilized land and outlease existing
buildings and property (Seattle)

 Repair/ modernize existing building and construct new space (GSA HQ, FOB
9)

 Tenant mix varies: all federal, federal and private sector, and federal
and retail space

Appendix 1: Potential Benefits of PublicPrivate Partnerships

Page 23 GAO- 01- 906 Public- Private Partnerships

13

Property Tenants Building size (square feet) Current occupancy

rate (percentage) Funds from operations ($) fiscal year 2000 Notes

GSA Properties Analyzed

Army Corps of Engineers believes that it must relocate to a facility that
meets seismic standards Seattle, WA

Washington, DC FOB 8 Portland, OR

Andover, MA Washington, DC

FOB 9 Washington, DC GSA HQ

Charleston, SC Columbia, SC

Jacksonville, FL Minneapolis, MN

Army Corps of Engineers, FBI motor pool, out-lease warehouse space

Food and Drug Administration (FDA) Immigration and

Naturalization Service (INS) Office of Personnel

Management (OPM) GSA Headquarters Internal Revenue Service (IRS)

Unoccupied Veterans Affairs (VA)

U.S. District Courts U.S. Postal Service

Military Enlistment Processing Service (MEPS)

607,543 rentable (mixed-use) 200,000 office

522,491 gross 479,840 rentable 137,281 gross

122,505 rentable 768,530 gross

673,924 rentable 710,431 gross 623,233 rentable

400,502 gross 393,520 rentable

99,695 BOMA 83,640 gross

802,249 rentable 290,855 gross 278,870 rentable

154,049 gross 143,197 rentable

Office: 8% Warehouse: 80% Motor pool: 100%

100% 100%

100% 100%

94% 10%

$ 3,293,485 $12,362,825

$(207,980) $9,922,041

$4,456,891 $2,016,191

$(1,003,372) $332,684

$1,517,038 $599,365

FDA to vacate building and return it to GSA in 2002, clean of any
environmental hazards May be hard to retain INS at end of lease

in fiscal year 2002 if building needs are not addressed Delegated building

Building vacant since 1999 due to damage from Hurricane Floyd

Courts will move to new courthouse in 2002 Delegated building --IRS pays its
operating

costs MEPS plans to vacate building June 2001 50%

98% 0

Appendix 1: Potential Benefits of PublicPrivate Partnerships

Page 24 GAO- 01- 906 Public- Private Partnerships

14

Property Private sector investment Government?s

investment Private partner IRR Government IRR Federal

facility demand Private sector interest Non-federal

market demand

Summary of GSA Properties Analyzed in Year 10 of a 50 Year Partnership

Table notes: 1 The private sector investment includes contributed capital
and financing obtained by the private sector investor.

2 The government?s investment is the value placed on the property that the
government is contributing to the partnership. 3 Based on the assumption
that the private sector would desire a 15% IRR in year 10 to become involved
with the project.

Source: Ernst & Young and AEW Capital Management, L. P.

+ = strong = moderate - = weak

Seattle, WA Washington, DC FOB 8 Portland, OR

Columbia, SC Washington, DC

FOB 9 Washington, DC GSA HQ

Charleston, SC Jacksonville, FL Minneapolis, MN

$74.5 M $121.1 M

$46.3 M $111.7 M

$52.4 M $30.5 M $23.3 M $13.0 M

$28.6 M $32.7 M

$4.8 M $29.8 M

$17.3 M $14.0 M

$4.7 M $10.0 M

$8.6 M 17.7%

17.3% 15.7% 15.3%

14.5% 14.4% 13.7%

13.7% 12.4% 10.3%

9.6% 15.1% 12.7% 15.1%

6.6% 9.4% 13.0%

9.9% 6.1%

0% none none

none none

- +

+

+

+

+

+

+ + ++ + +

+

+

+

+

+

+ 2 3 1

Andover, MA $233.0 M $2.4 M $9.2 M

Appendix 1: Potential Benefits of PublicPrivate Partnerships

Page 25 GAO- 01- 906 Public- Private Partnerships

15 Appendix 1: GSA Properties

Analyzed by Consultants

Appendix 1: Potential Benefits of PublicPrivate Partnerships

Page 26 GAO- 01- 906 Public- Private Partnerships

16

Seattle, WA Federal Center South

39 acre site in an industrial area

4 functionally obsolete buildings totaling 607,543 rsf (200k office)

Corps of Engineers (current tenant) has determined it must relocate to
seismic- safe facility

Waterway frontage and dock represent a valuable asset

Strong federal demand for new federal office building

Current Conditions Redevelopment Strategy Analyzed

Build new federal office building on 15 acres

300,000 sf in year 1

200,000 sf in year 3

Sublease 5 acres of land for industrial use (existing parking lot)

Sublease existing office/ warehouse buildings and remaining 11 acres of
land along waterfront to Port Authority (or equivalent)

Appendix 1: Potential Benefits of PublicPrivate Partnerships

Page 27 GAO- 01- 906 Public- Private Partnerships

17

Seattle, WA Federal Center South Potential Proceeds to Partners

(50 Year Master Lease) Master Lease Term Comparison Net Present Value of
Developer?s Cashflows

$0 $5

$10 $15

$20 $25

20 35 50 75

Source: Ernst & Young

Government partner

Net cash flow in year 10

Preferred return @ 9 percent Net cash flow share

Total

Projected lifetime IRR

Private partner

9.6% $1, 191, 842

$1, 191, 842 $1, 787, 762

17. 7% $4, 134, 512

$2, 346, 750

Years Millions

Appendix 1: Potential Benefits of PublicPrivate Partnerships

Page 28 GAO- 01- 906 Public- Private Partnerships

18

Washington, D. C. Theodore Roosevelt Building-- FOB 9 Current Conditions

Redevelopment Strategy Analyzed

Designed in an ?H- shaped? configuration

Currently occupied by the Office of Personnel Management

768,530 gross square feet

Complete redevelopment of the existing structure

New construction on the north and south sides to maximize buildable site

Total 1,038, 998 gross square feet and 833,150 rentable square feet

Appendix 1: Potential Benefits of PublicPrivate Partnerships

Page 29 GAO- 01- 906 Public- Private Partnerships

19

Washington, D. C. Theodore Roosevelt Building-- FOB 9 Potential Proceeds to
Partners

(50 Year Master Lease) $0 $5

$10 $15

$20 $25

$30 $35

20 35 50 Master Lease Term Comparison Net

Present Value of Developer?s Cashflows

Source: AEW Capital Management, L. P

Government partner Private

partner Net cash flow in year 10

Preferred return @ 11 percent Net cash flow share

Total

Projected lifetime IRR

Years Millions

$40,900

$40,900 15. 1% 17. 3%

$5, 456, 850

$61,350 $5, 395, 500

Appendix 1: Potential Benefits of PublicPrivate Partnerships

Page 30 GAO- 01- 906 Public- Private Partnerships

20

Portland, OR 511 Building Current Conditions

Redevelopment Strategy Analyzed

Historic building, 6 floors

Desirable location between CBD and trendy ?Pearl District? redevelopment
submarket

Existing federal demand supports renovation and new office tower

Historic property includes parking lot sought by City for North Park Mall
(pedestrian mall) extension

Current costs to maintain the property exceed revenues

Renovate historic building

storage use in basement

retail or restaurant on first floor

general office use on 2 nd - 6 th floors

Construction of 240,000 sf federal office building across the street

Additional site acquired through trade/ cross- lease of GSA parking lot for
city- owned lot

Appendix 1: Potential Benefits of PublicPrivate Partnerships

Page 31 GAO- 01- 906 Public- Private Partnerships

21

Portland, OR 511 Building

Potential Proceeds to Partners (50 Year Master Lease) Master Lease Term
Comparison Net

Present Value of Developer?s Cashflows $0 $2

$4 $6

$8 $10

$12 20 35 50 75

Source: Ernst & Young

Government partner

Private partner

Net cash flow in year 10

Preferred return @ 9 percent Net cash flow share

Total

Projected lifetime IRR $527, 383

$527, 383 12. 7%

$1, 458, 914 $791, 075

$2, 249, 989 15. 7%

Years Millions

Appendix 1: Potential Benefits of PublicPrivate Partnerships

Page 32 GAO- 01- 906 Public- Private Partnerships

22

Washington, D. C. GSA Headquarters Building Current Conditions

Redevelopment Strategy Analyzed

Originally completed in 1917 to house the Department of the Interior

Unique ?E- shaped? configuration

710,431 gross square feet of inefficient space that yields 623,233 rentable
square feet

Excellent location in the Central Business District close to the White
House

Complete redevelopment of the existing structure

Significant new construction adding office space within the courtyard areas

Total new space of 1, 000, 000 gross square feet with 850,000 rentable
square feet

Appendix 1: Potential Benefits of PublicPrivate Partnerships

Page 33 GAO- 01- 906 Public- Private Partnerships

23

Washington, D. C. GSA Headquarters Building Potential Proceeds to Partners

(50 Year Master Lease) $0 $5

$10 $15

$20 $25

20 35 50 Master Lease Term Comparison Net

Present Value of Developer?s Cashflows

Source: AEW Capital Management, L. P

Government partner Private

partner Net cash flow in year 10

Preferred return @ 11 percent Net cash flow share

Total

Projected lifetime IRR 15. 0% 15.3% $966, 219

$966, 219

$6, 366, 329

$1, 449, 329 $4, 917, 000

Years Millions

Appendix 1: Potential Benefits of PublicPrivate Partnerships

Page 34 GAO- 01- 906 Public- Private Partnerships

24

Columbia, SC VA Regional Office Building

Current Conditions Redevelopment Strategy Analyzed

*80,249 sf building occupied by Veterans Affairs (VA) in need of renovation
to retain occupancy

*Not efficient for VA?s use *Building is one in a complex of four federal
buildings *Relatively small project - could limit private sector developer
interest

*Completely renovate existing VA Regional Office Building *No excess land
for development *Parking to be provided by new parking garage to be
completed in June 2001, for all federal buildings in the complex

Appendix 1: Potential Benefits of PublicPrivate Partnerships

Page 35 GAO- 01- 906 Public- Private Partnerships

25

Columbia, SC VA Regional Office Building Potential Proceeds to Partners

(50 Year Master Lease) Master Lease Term Comparison Net Present Value of
Developer?s Cashflows

$0. 0 $0. 5

$1. 0 $1. 5

20 35 50 75

Source: Ernst & Young

Government partner Private

partner Net cash flow in year 10

Preferred return @ 11 percent Net cash flow share

Total

Projected lifetime IRR 6.6% 14.5% $51, 881

$51, 881

$367, 621

$77, 821 $289, 800

Years Millions

Appendix 1: Potential Benefits of PublicPrivate Partnerships

Page 36 GAO- 01- 906 Public- Private Partnerships

26

Andover, MA IRS Service Center Current Conditions

Redevelopment Strategy Analyzed

375,000 sf single story, highly- secured building on 37 acre site in need
of capital repairs

IRS currently leases 336,000 sf in additional office space in the area

Desire to consolidate IRS operations from numerous locations

Highly desirable site to City and local developers

Partnership to develop a small office park consisting of six, 5- acre pads

Year 1

Build new 4 story 700, 000 sf IRS facility and parking structure for
current and expiring IRS leases

Complex would be at rear of site to allow for security and a phased
development of the rest of site

Year 2

IRS moves into new facilities and the old building is demolished

Partnership constructs another 250,000 sf federal office building for non-
IRS expiring leases

Years 3 & 4

Partnership constructs two more 250,000 sf federal office buildings for
compatible agency and private sector occupancy

Appendix 1: Potential Benefits of PublicPrivate Partnerships

Page 37 GAO- 01- 906 Public- Private Partnerships

27

Andover, MA IRS Service Center Potential Proceeds to Partners

(50 Year Master Lease) Master Lease Term Comparison Net Present Value of
Developer?s Cashflows

$0 $5

$10 $15

$20 $25

$30 $35

$40 20 35 50 75

Source: Ernst & Young

Government partner Private

partner Net cash flow in year 10

Preferred return @ 9 percent Net cash flow share

Total

Projected lifetime IRR 9. 4% 14.4% $1, 271,158

$1, 271,158

$9, 246, 237

$1, 906, 737 $7, 339, 500

Years Millions

Appendix 1: Potential Benefits of PublicPrivate Partnerships

Page 38 GAO- 01- 906 Public- Private Partnerships

28

Washington, D. C. Federal Office Building 8 Current Conditions

Redevelopment Strategy Analyzed

Eight level building specifically constructed to house the Food and Drug
Administration (FDA)

FDA is scheduled to vacate the building in 2001 and return it to GSA, free
of FDA- generated hazardous materials, in 2002

Very desirable location, proximity to the Capitol, Smithsonian, and the
Mall

Completely renovate the building to greatly update and functionally improve
the space

Recapture existing laboratory space as office and add an additional 150
parking spaces to the existing 50 in the basement level.

Appendix 1: Potential Benefits of PublicPrivate Partnerships

Page 39 GAO- 01- 906 Public- Private Partnerships

29

Government partner

Private partner Washington, D. C.

Federal Office Building 8 Potential Proceeds to Partners

(50 Year Master Lease) Master Lease Term Comparison Net Present Value of
Developer?s Cashflows

Source: AEW Capital Management, L. P.

-$ 2 $0

$2 $4

$6 $8

$10 Net cash flow in year 10

Preferred return @ 11 percent Net cash flow share

Total

Projected lifetime IRR

$781, 470

$781, 470

13. 0%

$2, 310, 000 $1, 172, 206

$3, 482, 206 13. 7%

Millions 20 35 50 Years

Appendix 1: Potential Benefits of PublicPrivate Partnerships

Page 40 GAO- 01- 906 Public- Private Partnerships

30

Charleston, SC L. Mendel Rivers Federal Building Current Conditions

Redevelopment Strategy Analyzed

7- story 99, 695 sf office building on a 2.18 acre site

Contaminated, unoccupied building (asbestos) requires demolition and site
redevelopment

Costs incurred to maintain the property with no revenues generated

Highly desirable location and land value - strong potential for private
sector demand

Demolish existing structure

Construct 150,000 SF federal office building with structured parking

First floor bank with drive thru and upper floors for federal agencies and
private backfill

Appendix 1: Potential Benefits of PublicPrivate Partnerships

Page 41 GAO- 01- 906 Public- Private Partnerships

31

Charleston, SC L. Mendel Rivers Federal Building Potential Proceeds to
Partners

(50 Year Master Lease) Master Lease Term Comparison Net Present Value of
Developer?s Cashflows

-$ 1 $0

$1 $2

$3 $4

$5

Source: Ernst & Young

Government partner Private

partner Net cash flow in year 10

Preferred return @ 9 percent Net cash flow share

Total

Projected lifetime IRR 9.9% 13.7% $279, 928

$279, 928

$1, 381, 262

$419, 892 $961, 370

20 35 50 Years

75 Millions

Appendix 1: Potential Benefits of PublicPrivate Partnerships

Page 42 GAO- 01- 906 Public- Private Partnerships

32

Jacksonville, FL Courthouse Current Conditions

Redevelopment Strategy Analyzed

Six story historic courthouse in need of complete renovation

Occupied by US Courts (moving to new building in July 2002)

Federal demand exists but agencies tend to resist the Central Business
District location (due to access and parking constraints)

GSA recommended disposal; further action pending

City of Jacksonville is interested in acquiring the property

Renovation of the structure with historical property limitations

Convert to general office use with first floor used by U. S. Postal Service

Appendix 1: Potential Benefits of PublicPrivate Partnerships

Page 43 GAO- 01- 906 Public- Private Partnerships

33

Jacksonville, FL Courthouse Potential Proceeds to Partners

(50 Year Master Lease) Master Lease Term Comparison Net Present Value of
Developer?s Cashflows

-$ 2 -$ 1

$0 $1

$2 $3

Source: Ernst & Young

Government partner Private

partner Net cash flow in year 10

Preferred return @ 9 percent Net cash flow share

Total

Projected lifetime IRR 6. 1% 12.4% $119, 524

$119, 524

$914, 768

$179, 286 $735, 482

20 35 50 Years

75 Millions

Appendix 1: Potential Benefits of PublicPrivate Partnerships

Page 44 GAO- 01- 906 Public- Private Partnerships

34

Minneapolis, MN Federal Office Building Current Conditions

Redevelopment Strategy Analyzed

143,197 rentable sf historic building

Sole tenant (DOD) occupies 10% of the building and is vacating in June 2001

Limited potential federal use/ demand

Weak prospects for private sector backfill

Historic eligibility limits site redevelopment potential

Renovate the existing historic building

basement to be used for telecom hotel, open office, or tenant storage

1 st floor for restaurant or retail use

2 nd and 3 rd floors for general office use

Continued use of 65 parking spaces, pro- rata by tenants

Option of connecting to skyway at a cost of $1, 500, 000

Appendix 1: Potential Benefits of PublicPrivate Partnerships

Page 45 GAO- 01- 906 Public- Private Partnerships

35

Minneapolis, MN Federal Office Building

Potential Proceeds to Partners (50 Year Master Lease)

Master Lease Term Comparison Net Present Value of Developer?s Cashflows

-$ 2 -$ 1

$0 $1 $3

$4 $5

Source: Ernst & Young

Government partner Private

partner Net cash flow in year 10

Preferred return @9 percent Net cash flow share

Total

Projected lifetime IRR 0.0% 10.3% $ --

$--

$231, 742

$--$2 $231, 742

20 35 50 Years

75 Millions

Appendix II: Comments From GSA Page 46 GAO- 01- 906 Public- Private
Partnerships

Appendix II: Comments From GSA

Appendix II: Comments From GSA Page 47 GAO- 01- 906 Public- Private
Partnerships

Glossary Page 48 GAO- 01- 906 Public- Private Partnerships

Building Owners and Managers Association International, a trade association
of the office building industry, that developed a standard method of floor
measurement in square feet for commercial real property.

Net operating income minus master ground lease, debt service, and
replacement reserve.

A designated downtown section of a city, generally consisting of retail,
office, hotel, entertainment, and government land uses with some highdensity
housing.

Amount required for payments of interest and principal (often insurance and
tax escrows, too) on money owed.

Percentage rate used in discounting cash flows in calculations of net
present value.

The process of estimating the budgetary effects of pending and enacted
legislation and comparing them to limits set in the budget resolution or
legislation. Scorekeeping tracks data such as budget authority, receipts,
outlays, and the surplus or deficit.

Total enclosed floor area of a building measured in square feet. A lease for
the use and occupancy of land only for a period of time. The rate of return
charged by a lender for the use of funds, expressed in the form of a
percentage per year.

The present value interest rate received for an investment consisting of
payments and income that occur at regular periods; measures the return,
expressed as an interest rate, that an investor would earn on an investment.
Glossary

BOMA Cash Flow Central Business District

Debt Service Discount Rate Federal Budget Scoring

Gross Square Feet Ground Lease Interest Rate

Internal Rate of Return

Glossary Page 49 GAO- 01- 906 Public- Private Partnerships

A written agreement between the property owner and a tenant (lessor) that
stipulates the conditions under which the tenant (lessee) is entitled to use
the property (in this case, real property) in return for periodic payments
(rent) for a specified period of time.

A controlling lease under which all other interests in the real property are
subordinate; for example, if a master lease is for a 5- year term, a
sublease cannot legally exceed 5 years.

Cash flow minus preferred return to the private partner. Operating income
minus operating expenses. Method of converting a cash flow stream over a
number of years into the value of that money today, using an appropriate
discount rate, in order to make investment decisions.

Broad term used to describe the expenses incurred in ordinary recurring
activities of a property as opposed to nonrecurring items.

Earnings from normal operations that do not take into account proceeds from
nonrecurring items.

A distribution of income to the private partner prior to the distribution of
net cash flow in accordance with the terms of the partnership, generally to
compensate the private partner for its cost of capital and risk incurred.

Value today (or at some specific date) of an amount to be paid or received
later.

An arrangement by which the federal government contributes real property and
a private entity contributes financial capital and borrowing ability to
redevelop or renovate real property to serve, in part or in whole, a public
need. Lease

Master Lease Net Cash Flow Net Operating Income Net Present Value

Operating Expenses Operating Income Preferred Return

Present Value Public- Private Partnership

Glossary Page 50 GAO- 01- 906 Public- Private Partnerships

A term used in the commercial real estate market that includes occupiable
square feet plus the tenants? proportional share of common building areas,
such as rest rooms, exit stairways/ fire corridors, and lobbies.

Amount set aside from net operating income to pay for renovation or
replacement of short- lived assets.

Unit of area measurement equal to a square measuring one foot on each side.

An arrangement whereby a lessee leases the property to a different end user
while the lessor maintains ownership and the lessee retains all of its
obligations under the lease; terms cannot exceed that of a master lease.
Rentable Square Feet

Replacement Reserve Square Foot Sublease

(393012)

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